Beneficiary designations — the document that overrides the will

This article is for educational purposes only and does not constitute medical, legal, or financial advice. Every family situation is different, and you should consult with appropriate professionals about your specific circumstances.

Your mother's will said her life insurance was supposed to go to her children equally. But when she died, the insurance company paid the benefit to her ex-husband. She'd named him as the beneficiary thirty years ago when they were married and had never updated it. The will said one thing. The beneficiary designation said something else. The beneficiary designation won. Your mother's actual wishes, expressed in her will, didn't matter because a beneficiary designation overrode them.

This is a fact about beneficiary designations that many people don't understand. A beneficiary designation on a retirement account, a life insurance policy, or a bank account overrides the will. If your parent has a will saying the retirement account goes to their child, but the retirement account has a beneficiary designation naming the ex-spouse, the money goes to the ex-spouse. The beneficiary designation controls. This is not a legal loophole. It's how the system is designed. But it means beneficiary designations need to be carefully managed and kept current.

Beneficiary designations matter enormously for estate planning, but they're often overlooked. Many people don't even realize they have beneficiary designations. They don't realize that these designations override their will. They don't realize how important it is to keep them updated. Understanding what beneficiary designations are and how they work helps you protect your parent's estate and make sure your parent's wishes are actually carried out.

Understanding the Basics

A beneficiary designation is a form that you fill out when you open certain accounts. You name who you want to receive the money in the account if you die. For life insurance, you name who should receive the death benefit. For a retirement account like a 401k or IRA, you name who should receive the account balance. For a bank account, you might set it up as "payable on death" to someone, which is a type of beneficiary designation.

When you fill out the beneficiary designation, you're making that specific choice. Many people do this casually. They fill out the form because the company requires it. They name whoever is important to them at the time. For young people, they might name their spouse. For older people, they might name their children. But then life changes. People divorce. People die. People remarry. The beneficiary designation sits there unchanged for decades, naming someone the account holder no longer wants to have the money.

A beneficiary designation creates a contract between the account holder and the financial institution. The institution agrees that when the account holder dies, the money will go to the named beneficiary. This is separate from what the will says. The beneficiary designation is a specific contract that overrides general estate planning documents.

This is both a feature and a problem. It's a feature because it means certain assets can pass to beneficiaries without going through probate. The money goes directly to the named beneficiary. No court involvement. No delays. This can be beneficial. It's a problem because beneficiary designations often sit unchanged for years while life changes, and then you end up with money going to the wrong person.

Some beneficiary designations are more flexible than others. On retirement accounts, you might be able to name a primary beneficiary and a contingent beneficiary. If the primary beneficiary dies before you, the money goes to the contingent beneficiary. You can also name multiple beneficiaries to split the money among them.

Beneficiary designations can be changed anytime while you're living. You can contact the institution and request a change to the beneficiary designation. They'll provide a form, you fill it out naming the new beneficiary, and the designation is updated. This is simple and should happen whenever your situation changes. But many people don't do it.

Beneficiary designations become set in stone when you die. Once you die, the designation cannot be changed. The money goes to whoever is named. This is why keeping beneficiary designations updated during your lifetime matters so much.

What Beneficiary Designations Cover

Life insurance policies have beneficiary designations. When you buy life insurance, you name who you want the death benefit to go to. When you die, the insurance company pays the death benefit to that beneficiary. This avoids probate.

Retirement accounts have beneficiary designations. 401k plans, IRAs, 403b plans, all require beneficiary designations. The money in these accounts goes to the named beneficiary when you die.

Bank accounts can have "payable on death" designations. You can set up a bank account to be payable on death to someone. When you die, the money goes directly to that person.

Investment accounts can have transfer on death designations. Similar to payable on death bank accounts, you can set up an investment account to transfer to someone when you die.

Some life annuities have beneficiary designations. If you have an annuity contract, you name who receives the remaining balance if you die before the contract is fully paid out.

Some employer benefits might have beneficiary designations, including survivor benefits through pensions or long-term care insurance.

Your Parent's Specific Situation

Your parent probably has beneficiary designations on life insurance, retirement accounts, or bank accounts. You might not even know about all of them. Start by asking your parent. What life insurance does your parent have? What retirement accounts? What bank accounts? Do you know who's named as beneficiary on each?

Help your parent get a list. Contact the insurance company and ask who's named as beneficiary on the life insurance. Contact the retirement account custodian and ask about the beneficiary designation on the retirement account. Contact the bank and ask about any payable on death designations.

Once you have a list, review it. Is the person named still the person your parent wants to have the money? If your parent is named a beneficiary for money that's supposed to go to your parent, that's fine. But if your parent's ex-spouse is named, or if someone your parent no longer has a relationship with is named, the designation is outdated.

Think about your parent's life changes. If your parent was married when they set up beneficiaries thirty years ago and is now divorced, the beneficiary designations probably need to be updated. If your parent has since had grandchildren they want to benefit, the designations might need updating. If your parent's situation has changed, the designations probably need changing.

Consider also whether the designations work well with your parent's overall estate plan. If your parent has a will leaving money to their children, but the retirement account is set to go to the ex-spouse, those are in conflict. Getting them aligned makes sense. Beneficiary designations should support your parent's overall estate plan, not contradict it.

Taking Next Steps

Help your parent make a list of all accounts that might have beneficiary designations. Life insurance, retirement accounts, bank accounts, investment accounts, annuities, anything where your parent specified who should receive money or assets if your parent dies.

Contact each institution and ask about the current beneficiary designation. Request a form if your parent wants to change it.

If beneficiary designations need to be updated, fill out the forms and submit them to the institutions. This is simple but important. Make sure the forms are signed and dated properly. Different institutions have different requirements, but most just require a form signed by the account holder.

Keep records of all beneficiary designations. Make a list with the account, the institution, and the named beneficiary. Store this with your parent's other important documents. This list will be valuable when your parent dies because the executor will need to know what accounts exist and where they're going.

Consider how beneficiary designations fit with your parent's overall estate plan. If your parent has a will, make sure the will and the beneficiary designations don't conflict. If they do, decide which to change.

Talk with your parent about whether the current designations make sense. Ask directly: "Is [person] still the person you want to have this money?" If the answer is no, update the designation.

This is one of those areas where people's intentions and their documents get out of sync. Your parent might think the money is going somewhere, but the beneficiary designation says otherwise. Taking time to review all beneficiary designations and make sure they match your parent's actual wishes is important. It only takes a few minutes per account and can prevent serious problems later.

How To Help Your Elders is an educational resource. We do not provide medical, legal, or financial advice. The information in this article is general in nature and may not apply to your specific situation. If you are concerned about a loved one's cognitive health or safety, consult with their healthcare provider or contact your local Area Agency on Aging for guidance and support.